Pension Tax Relief - the key to pension saving
Pension tax relief is the key element of all pension saving.
Pension tax relief acts as an incentive for savers to put their money away for the long term, to make provision for their pensions income in retirement.
More importantly, pension tax relief provides you with a generous tax rebate from HMRC, which gives your savings a great boost from day one. Pension tax relief is what makes the pension an unbeatable way to save for the long term.
Let us tell you how pension tax relief will boost your savings. Click here for Pensions Advice or call 0800 678 5929
Pension tax relief is given as a percentage of the contributions you make to your pension scheme. For that reason it is sometimes also known as pension contribution tax relief.
Pension tax relief is paid at standard rates, irrespective of what type of pension you have. Whether stakeholder pension tax relief, or tax relief paid into a personal pension , the levels relate to the marginal (i.e. highest) rate of tax you pay on your earnings.
For those earning £44,875 or less per year, the marginal tax rate is 20%. Those earning more than that will pay income tax at the higher tax rate of 40%. Pension contributions tax relief is paid to both from tax they have already paid, and at the same percentage as the amount of tax they pay.
For example, a basic rate taxpayer, paying tax at 20%, is entitled to pension contributions tax relief equal to 20% of the total contribution to his pension. This means that for every £100 paid into the pension, 20% will be made up of pension tax relief. In other words, the saver pays only £80 of that, and the remaining 20% (or £20) in the £100 is pension tax relief.
For a higher taxpayer, 40% of the total pension contribution of £100, in other words £40, will consist of pensions tax relief. This means that the higher rate taxpayer only had to pay in £60, in order to achieve a full £100 contribution to their pension.
Only half of the pension tax relief for a higher rate taxpayer is paid into the pension fund, however. This means that of the £40 he stands to receive in tax relief, £20 will be paid into his pension fund and the other £20 will be rebated to him as cash, when he claims it via his tax return. There is no obligation to use this cash as a pension contribution – it can be spent in any way the pensions saver chooses.
